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How big business will make billions on the legalization of pot

Legalization is coming, and soon.

Sarah Barmak and Michael McCulloughMarch 13, 2013

(Makito Inomata)

At a beige, two-storey building outfitted with security cameras, in the shadow of several affluent Toronto condos, a steady trickle of customers comes to buy pot. Ready with cash and either Health Canada authorizations or doctors’ notes saying their patients report relief when using marijuana, they walk up to a counter inside Cannabis As Living Medicine (CALM), one of the city’s longest-running medical pot dispensaries. Two-gram bags start at $14 each. (The shop will sell 28 grams at most to a patron per week.) A display case shows some enticing options that wouldn’t look out of place in a Tim Hortons: chocolate chip cookies, brownies topped with greenish marshmallows. A menu lists ingredients, prices and exactly how much marijuana they contain (typically one or two grams each). Many health-conscious patients can’t, or don’t wish to, inhale.

CALM owner Neev Tapiero, whose dark brown eyes never seem to fully open beneath his Muppet-sized eyebrows, boasts an encyclopedic knowledge of marijuana. Since starting CALM as an upstart, bicycle-mounted weed delivery service 17 years ago, the 41-year-old has served roughly 4,000 customers and become one of Toronto’s biggest ganjapreneurs. He has two outstanding trafficking charges resulting from two 2010 police raids on CALM when it was in a different location; a neighbour complained about the smell, he explains in his second-floor office as he puffs a large joint. But that hasn’t deterred him. If marijuana were to be legalized in Canada, and the rules were liberal and fair, Tapiero says, he would be among those ready to go legit.

CALM founder Neev Tapiero (Photo: Jamie Hogge)

In spite of a hazy policy climate in Canada—the Conservative government seems committed to a more restrictive policy on marijuana, not less—there is an ever more visible grey market in Canada catering to cannabis users. Health Canada’s Marijuana Medical Access Program has quietly exploded from less than 500 authorized users in 2002 to more than 28,000 in little over a decade. Medical marijuana dispensaries, online seed sellers, head shops selling drug paraphernalia, sellers of hydroponic equipment and so-called vapour lounges where customers are welcome to smoke their own weed make up a budding industry, not just in big cities but in suburbs and small towns too. In Vancouver, there is even a company offering tours of the city’s high-minded establishments.

For the entrepreneurs running these businesses, the dream of legalization now appears tantalizingly close at hand. Ballot initiatives passed in Colorado and Washington last November make it legal in those states for adults to possess and consume cannabis for recreational purposes. The sprouting of these islands of legality, observers predict, will spur other states to open up their cannabis markets lest they lose out on revenue and tourism, much as the casino gambling pioneered in Las Vegas became ubiquitous across the continent. On Feb. 5, U.S. Democrats introduced two bills in the House of Representatives—one that would legalize pot and regulate it under a renamed Bureau of Alcohol, Tobacco, Marijuana and Firearms, and another that would tax it. At least one private equity firm, Privateer Holdings, has been established to focus on the “emerging legal cannabis field.” (Its first investment is Leafly, which offers reviews of dispensaries and marijuana varieties.)

Canada, considered a pioneer of herbal tolerance less than a decade ago, could find itself playing catch-up, belatedly adopting someone else’s drug policy. “It’s going to happen pretty fast,” predicts Greg Williams, manager of the B.C. Marijuana Party and Marc Emery’s Cannabis Culture, both of which occupy a heritage building in a gentrification-resistant part of Vancouver popularly known as the Vansterdam block. Owned by Jodie Emery, wife of so-called Prince of Pot Marc Emery (who is currently serving time in a U.S. prison for selling seeds online), the building and its various enterprises deliberately pushes the envelope of legal or at least tolerated business activity. Were the product to be legalized, “we’d be primed to begin selling marijuana,” says Williams.

That eventuality would present a significant business opportunity. A peer-reviewed study by researchers at the University of British Columbia and Simon Fraser University, published recently in TheInternational Journal of Drug Policy, pegged the retail value of marijuana consumption in B.C. alone at between $443 million and $564 million. The study further estimated that legalizing the industry could generate $2.5 billion in license fees and taxes over five years.

“This market is quite sizable,” says UBC business professor Werner Antweiler. The industry is likely larger than the study suggests, he adds, due to the export of “B.C. bud” to the south and east. Other estimates that factor in the value of cannabis exports as well as internal consumption pin the size of the B.C. industry at between $2 billion and $7 billion. It’s safe to say that Canadians generally spend at least $3 billion a year on cannabis products.

Canadians bought $9.1 billion worth of beer in 2011 according to Statistics Canada. That means an illegal drug is already one-third the size of a legal industry that benefits from national advertising and a vaunted spot in Canadian culture. When marijuana finally becomes legal, who will score a piece of the action?

(Randall Benton/Sacramento Bee/MCT via Getty Images)

The visible failure of the war on drugs, combined with a generational tipping point in attitudes, has poll after poll showing a majority of adults favouring the legalization or at least decriminalization of recreational cannabis use. An Angus Reid poll of 799 British Columbians last October suggested 75% felt it should be taxed and regulated rather than prohibited, up six percentage points from a year earlier. “These beliefs cut across political, social and regional lines. I can’t think of any other issue where the laws on the books are inconsistent with the wishes of three-quarters of British Columbians,” said Angus Reid vice-president Mario Canseco at the release of the numbers.

Efforts at a change in policy continue to run up against fear of the unknown, however. Unlike the lifting of alcohol prohibition, there is no history of legalized, large-scale marijuana production. Even in the Netherlands, where consumption in public coffee bars has been legal for decades, growers operate under the blind eye of officialdom and have no legal recognition.

Colorado and Washington have now begun to offer real-world case studies of how to legalize pot—and whether to treat it as a drug, a crop or a vice. Even before election-day amendments in both states legalized recreational use in November, they already had thriving medical markets. Michael Elliott, executive director of the state’s Medical Marijuana Industry Group, estimates Colorado is home to as many as 1,000 licensed growing facilities. And these are no hippie communes—the high cost of security and surveillance equipment required by state regulations means they need to be sizable to succeed.

The state has more than 108,000 medical users, and the potential market is multiple times larger. Thanks to Colorado’s Amendment 64, any adult over 21—including out-of-state tourists—can now legally possess up to one ounce of pot, which they are allowed to buy from licensed retailers—which lawyer Rob Corry, who became known in Colorado for challenging its pot laws, hopes will soon be as common as bars.

Washington voters passed legalization measure Initiative 502 with a margin of nearly 10 points. The state will treat pot as a vice, like liquor or tobacco, and its liquor control board will charge fees to license producers, refiners and retailers, and levy a 25% excise tax on every ounce sold. This “closed, highly regulated industry” described in a financial impact study is expected to add as much as US$1.9 billion to the state’s bottom line over five years through increased revenues and savings on marijuana enforcement.

So far, the American experience suggests the first ones into the legalized recreational market will be those already operating in the medical market. Many Colorado medical dispensaries are large, with more than 500 registered patients each. “They have a major advantage,” says Corry, who is now offering legal advice to dispensaries making the transition to retail—which, he says, will be most of them.

Colorado’s journey toward legalized pot has already revealed tantalizing potential for the food industry. The state’s Medical Marijuana Infused Product Manufacturer license allows producers to lace snack and drink products with the psychoactive chemicals found in cannabis—and those foods, developed by new edible pot brands, are now available to everyone. “There are products that help you sleep, help you keep your food down, help you with pain relief,” says Elliott. “You can go and buy an (infused) oil and take it home and put it into anything you want. There’s everything from soft drinks and candies to cookies and granola bars.” Some makers of pot-laced goodies have seen huge revenues, none more than Dixie Elixirs, the largest infused product manufacturer in Colorado. Founded in 2010, yet already considered by some the Budweiser of the infused cannabis industry, Dixie operates out of a 27,000-square-foot Denver facility and distributes its mints, chocolate truffles and its marquee product, candy-coloured fizzy sodas, to almost all of the more than 500 medical pot retailers in the state. The sodas come in flavours such as Sparkling Red Currant and sugar-free Mixed Berry Flavored Water and have slick, minimalist labels—no tie-dye patterns or pot leaves in sight. Owner Tripp Keber says his company’s revenue increased nearly 130% last year. Its parent company, Medical Marijuana Inc., saw a record $3.4 million in net revenue for the fourth quarter of 2012. Keber says he’s gotten calls from Canadian entrepreneurs eager to distribute his product as soon as it’s legal to do so.

In a crowded, yet suspiciously languid café above a Yonge Street shop in Toronto, two young men fiddle with a glass water pipe with a two-inch square of titanium attached to a stem at its end, which has been blasted red-hot by a propane torch. On the square is a tiny morsel of “budder”—an intensely concentrated form of marijuana, said to contain as much THC as a large joint.

Sham Chaabo, 24, inhales from the pipe’s business end as the potent tidbit flares and quickly turns to dark smoke. He is momentarily dazed, but soon resumes chatting with his friends. It’s a typical Wednesday night in January at Vapor Central, one of Toronto’s premier pot bars, known as vapour lounges. Every seat is taken as guests await the start of a comedy show. (Could a comic have a more receptive audience?) Chaabo, a York University student, first came here four years ago after hearing there was a place he could smoke indoors, unbothered by cops. “I was stunned,” he says of discovering the hangout, with its leather sofas, tables, a stage and an array of paraphernalia for patrons to rent. “I couldn’t believe it.” But Canada is becoming a place where laws relating to cannabis are applied selectively. Where police and their municipal masters have higher priorities and tight budgets, tolerance rules. But now legalization stateside is forcing the issue onto the national agenda.

“There’s no way Canada will be left in the dust in this billion-dollar industry,” says York University law professor Alan Young, who has spent the past two decades in courtrooms challenging Canada’s criminal pot laws on behalf of medical users. Despite the federal government’s intransigence, to Young, the legalization of marijuana in Canada is a matter of when, not if. The challenge is creating a legitimate industry when the expertise in growing and distribution mostly resides in the black market. “The problem is, there’s a disconnect between capital and the world of marijuana production,” he says. The vast majority of that industry—an estimated 85%—is currently controlled by organized crime. The question facing those jurisdictions legalizing the pot trade is how to make the transition from a criminal to a regulated and taxed industry.

(Newscom)

Among those most ready to capitalize on legalization are medical retailers, like CALM’s Tapiero. They have the expertise and the supply chains in place. Next in line would be other grey-market operators. But the big unknown is whether and how people currently in the black market would go legit. This is where most of the growing expertise currently resides. According to Cannabis Culture’s Williams, many only work in the black market because of prohibition and would gladly come out into the open. But there are others with a checkered past who would prefer not to be known or to operate under regulatory constraints. As with contraband cigarettes, the black market will persist if taxation proves too onerous. “If the state wants to sell me marijuana, it’s going to have to be cheaper and just as good as I’m getting now,” Williams says. Tellingly, only 13% of registered medical marijuana users in Canada buy from Health Canada’s approved (and taxpayer-subsidized) grower, Saskatoon’s Prairie Plant Systems.

Perhaps in recognition of this reality, the medical program is about to change in a way that could lead to a boom in licensed dealers and smokers. By April 2014, Health Canada will be getting out of the pot business, opening up the market to licensed producers and letting individuals buy it with only a doctor’s note (they currently need Health Canada authorization). Though it will primarily let growers ship medical marijuana through the mail, the changes have some in the pot community dreaming bigger. Olympic gold medalist Ross Rebagliati has grand plans for a flashy chain of medical pot shops in B.C. called Ross’s Gold that would make CALM look quaint, even though it’s as yet unclear whether storefront pot sales will be allowed.

Despite the changes on the medical front, the federal Tories have not only indicated their intention to keep marijuana in the Criminal Code, but have also introduced mandatory minimum sentences of six months on small-time grow-ops—six or more plants—as part of the omnibus crime bill, Bill C-10. Ottawa’s hawkish stance appears increasingly at odds with public opinion, creating an opening for politicians willing to come out on the legalization side. “We can’t continue to ignore the remarkable consensus among the public,” says B.C. Liberal MLA Kash Heed, a former police chief. In January, a committee of the federal Liberal party, following a vote in favour of decriminalization a year earlier at the party’s convention, came out with a 38-page paper advocating full legalization. “My view is that the public consensus has shifted, and politicians at the national level are lagging behind,” says Vancouver lawyer Geoff Plant, a former B.C. attorney-general. He thinks it would not take long for the federal government to change direction, especially in the face of developments in the U.S. “This is an issue whose time has almost come,” he says. “It may not be this prime minister. It could easily be the next.”

When change does come, it will be a victory not just for potheads and activists calling for the government to butt out of the ashtrays of the nation. It will be a money-making opportunity, both for entrepreneurs who dream of growing a business and politicians who will be more than happy to tax it.